Free Markets, Free People

Economy

Fidel Castro – Socialism doesn’t work

We could have told him that 50 years ago:

Fidel Castro told a visiting American journalist that Cuba’s communist economic model doesn’t work, a rare comment on domestic affairs from a man who has conspicuously steered clear of local issues since stepping down four years ago.

[…]

Jeffrey Goldberg, a national correspondent for The Atlantic magazine, asked if Cuba’s economic system was still worth exporting to other countries, and Castro replied: "The Cuban model doesn’t even work for us anymore" Goldberg wrote Wednesday in a post on his Atlantic blog.

[…]

The state controls well over 90 percent of the economy, paying workers salaries of about $20 a month in return for free health care and education, and nearly free transportation and housing. At least a portion of every citizen’s food needs are sold to them through ration books at heavily subsidized prices.

Of course the "Cuban model" only “worked” while the USSR existed. It was essentially based in heavy subsidies paid Cuba by the USSR for being its main proxy in the Americas. And the USSR’s woes most firmly underlined the problems with a centralized demand economy run by the state. Even so, Cuba continued on along that vein even after their greatest benefactor and financial supporter collapsed like a wet paper box. Now, finally, after pushing Cuba into poverty, Castro admits socialism is a bust.

China, while still totalitarian, recognized the economic problems soon enough to avert a similar disaster by loosening up economically. Cuba and North Korea, though, have continued to use the disastrous economic model and are basket cases (Cuba has instituted some modest economic changes, but not enough to break the dependency on the state the government of Cuba had ingrained on multiple generations of its population).

Of course Castro’s admission comes to late for the people of Venezuela who’ve been roped into a Cuba-style socialist government by strong man Hugo Chavez. Predictably, the Venezuelan economy is in shambles.

You have to wonder how many more ruined economies it will take before the socialists of the world (or wannabes) recognize that their brand of government and economics is a disaster and has probably ruined more lives than any other economic system in history.

~McQ

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Obama puts politics above the economy

From The New York Times:

President Obama on Wednesday will make clear that he opposes any compromise that would extend the Bush-era tax cuts for the wealthy beyond this year, officials said, adding a populist twist to an election-season economic package that is otherwise designed to entice support from big businesses and their Republican allies.

Mr. Obama’s opposition to allowing the high-end tax cuts to remain in place for even another year or two would be the signal many Congressional Democrats have been awaiting as they prepare for a showdown with Republicans on the issue and ends speculation that the White House might be open to an extension. Democrats say only the president can rally wavering lawmakers who, amid the party’s weakened poll numbers, feel increasingly vulnerable to Republican attacks if they let the top rates lapse at the end of this year as scheduled.

But the problem is that raising taxes in a recession is considered by all objective thinkers to be folly.  In fact, the President said so himself as I reminded you recently:

Normally you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is—his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”

But they are going to raise them in a recession now.  “Scott”, by the way, was a person who submitted a question at an Obama townhall through MSNBC’s Chuck Todd.  Obama admitted that it was the wrong thing to do in a recession.  And folks, we’re still in a recessionary period whether or not the spin artists with the administration prefer “recovery summer” (another flop) or not.

The NYT goes on:

It is not clear that Mr. Obama can prevail given his own diminished popularity, the tepid economic recovery and the divisions within his party. But by proposing to extend the rates for the 98 percent of households with income below $250,000 for couples and $200,000 for individuals — and insisting that federal income tax rates in 2011 go back to their pre-2001 levels for income above those cutoffs — he intends to cast the issue as a choice between supporting the middle class or giving breaks to the wealthy.

Of course, he’s presenting a false choice.  There’s a third choice – keep the tax cuts for all and cut spending.  But, you can’t stir up class warfare and spend more money unless you demonize the rich and claim you’ll be spending their money for the benefit of the “middle class”.

Any American that falls for the sort of populist class envy nonsense is most likely fine with the government we have and any silver pieces they can siphon off as a result.

That said, the NYT’s first sentence in that paragraph says a lot.  Does Obama have the heft to carry this off.  We all know the GOP will be the whipping boy for any failure, but unless every Democrat in both chambers of Congress stand up and vote for it, it will be a difficult thing to sell to a skeptical electorate who’ve heard all this nonsense before.

Politically, however, the president is, in effect, daring Republicans to oppose the plan, in that way proving Democrats’ contention that they will block even their own ideas to deny Mr. Obama any victories. And by proposing business tax breaks that, according to nonpartisan analyses, would do more to stimulate the economy than extending the Bush tax rates for the wealthy, Mr. Obama hopes to buttress Democrats’ opposition to extending those rates.

Let him dare the Republicans.  If they’re smart (and that’s always debatable) they’ll use the President’s own words against him.  That would be their most effective tool.  And that would also put Democrats in marginal districts on notice that if they vote not to extend the cuts, they’re doing what their President once admitted was a terrible  idea in bad economic times.  And, they should understand, they can count on hearing that repeated in ads in their districts along with how they voted.

~McQ

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Krugman – wow, just "wow".

I really don’t know how to actually characterize my reaction to this nonsense from Paul Krugman except to say if you thought he was in bizarro land before, check this out. The irony is he calls others stupid and invokes "Economics 101" when it’s clear … well you take a look. Here he’s talking about the proposed $50 billion "stimulus" focused on infrastructure. And he begins to pontificate:

Beyond all that, the new initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money.

Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.

I had a friend who would accuse people like Krugman of being like a goose and waking up in a new world everyday. Apparently in today’s new world Krugman has forgotten that we just spent most of a trillion borrowed dollars on infrastructure stimulus. And then there was TARP, cash for clunkers, home buyers tax credit, mortgage payment relief and unending unemployment benefits. But it’s all too small now and it’s the fault of the usual suspects.

What Krugman doesn’t want you to remember, of course is his own recommendation on the size of the stimulus package:

All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.

In fact, the administration added 30% to his number and now, suddenly, it’s all too small. Not only that, it failed miserably.  And, when you add it all up, it’s about 3 trillion in spending for “public goods” over two years added to the federal debt. 

Result? 14.9 Americans unemployed, the economy in a shambles and consumers afraid to spend.  And Krugman, in his new world today, demands more spending and has the temerity to call those opposing it stupid and his approach “econ 101”.

To add to the Krugman madness, we have him essentially pining for the good old days of spending like we did during WWII.   Despite the fact that it all but destroyed the world and did destroy about 80 million lives, that’s the level of spending he now thinks is needed. 

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

This is possibly the most blinkered and absurd bit of revisionist history I’ve read in a long time. There’s a "rest of the story" that makes this so much word salad that Krugman obviously studiously ignores in order to attempt this absurd plea to what, spend the equivalent of 30 trillion in deficit dollars (or to drive home the point that 3 trillion isn’t nearly enough)?

Victor Davis Hanson handily disassembles Krugman’s “work” and shows it up for the dishonesty that it is:

As WWII ended and the clean-up began, there was an enormous amount of pent-up global demand for goods. Given the wreckage in Europe, Japan, and Russia and the underdevelopment of India, Asia, and South America, we were about the only ones with the industrial and commercial wherewithal to supply the world rebound — often receiving cheap oil, gas, minerals, and interest in exchange, which supplemented our own vast supplies of comparatively cheap and easily recoverable resources. Nor should we forget the psychological element: Americans, after winning two wars, were enormously confident about their newfound international stature and influence.

At home, four years of consumer deprivation during the war and the weak demography of the 1930s had combined to create huge demand, all while society was increasingly leaving the farm for good and becoming suburbanized. The result was that in the late 1940s and 1950s, the birth rate soared and consumers enthusiastically made first-time purchases of washers, dryers, fridges, cars, etc. Thus, the American economy grew by leaps and bounds.

Today’s situation is not comparable: We are in hock to foreign creditors for trillions and have not been a net creditor since the 1980s. A China, Brazil, South Korea, Taiwan, or India is as or more likely to supply recovering demand for food, steel, or electronics. One can read Krugman-like arguments in Greek newspapers today — that only more massive borrowing can stimulate Greek demand, provide jobs, and grow Greece out of its recession. As if present-day deficits and aggregate debt with soon-to-be-rising interest payments don’t really matter.

It is always an indication that you probably shouldn’t pay much attention to a certain economist when it takes an expert in history to tell the economist his business.

But then that’s to be expected if you wake up in a new world everyday as it appears Paul Krugman does.

~McQ

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Orszag – keep Bush tax cuts for now

Obama’s former Budget Director has landed a job at the NY Times as a columnist, and for his first column, essentially says that plans to end the Bush era tax cuts at this time are, well, stupid.

Apparently, finally being able to breath the air outside the beltway has reinvigorated the “common sense” node in his brain

In the face of the dueling deficits [jobs and budget –ed.], the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt.

Instead, what we got today from the administration was more of the same – a proposal for $50 billion in infrastructure spending over 6 years.  Not only that, dear friends, but within that proposal is one for a new government run “infrastructure bank”   After our glowing successes with Freddie and Fanny, this is the perfect answer.  And, if you’re as cynical as I am, you’ll probably assume the only jobs that will come out of this are those in the new “infrastructure bank” and those who will still be doing the environmental impact studies in 6 years time on the projects Obama wants to fund through the bank.

Back to Orszag though.  While he is right about the tax cuts, he then says this:

Despite a dire fiscal outlook, many progressives want to make the tax cuts permanent for all but the very highest earners. Many conservatives are even worse: they’d make the tax cuts permanent for the likes of Warren Buffett, even though he’d prefer they didn’t. Making all the tax cuts permanent would expand the deficit by more than $3 trillion over the next decade.

Anyone – what hasn’t been calculated in all of this?   That’s right, cut spending by that amount over the next decade.  That’s 300 billion a year. 

And, note carefully what Orszag is saying here.  He’s talking about ending all the Bush era tax cuts, not just those for the “rich”..  Per the CBO, leaving those cuts for the very highest earners in place will only cost $700 billion over 10 years. The $3 trillion number includes the middle class.

Orszag, as expected of a former budget director, goes on to analyze the future budgets.  He notes that by 2015 – a mere 5 years from now – the deficit will comprise 4 to 5 percent of the GDP.  His analysis is below:

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries — and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

The other half of the budget is mostly net interest (which is not negotiable unless we renege on our debt) and discretionary spending. Discretionary spending is split roughly equally between defense and non-defense spending. The defense component already assumes a phase-down in both Iraq and Afghanistan; saving an additional 5 percent of the Pentagon’s base budget would be a substantial accomplishment and would yield about 0.2 percent of G.D.P. Cutting 5 percent out of non-defense discretionary spending, a stretch politically, would save about as much.

It would be tough, then, to squeeze more than a half percent of G.D.P. from spending by 2015. Additional revenue — in the range of 0.5 to 1.5 percent of the economy — will therefore be necessary to reduce the deficit to sustainable levels.

Summary – cut defense spending … a lot.  Not going to happen with Republicans poised to sweep into the House and possibly take it over.   Cut non-defense discretionary spending – most likely not going to happen regardless of who is in control of the government or the legislature … at least not the the level Orszag thinks is necessary.  “Additional revenue”, a code phrase for “raise taxes”.

Don’t believe me?  The first thing out of his pen after his analysis is this:

One possibility would be to establish a new source of revenue, perhaps through revenue-increasing tax reform, and possibly including a modest value-added tax (that is, a V.A.T. of 5 percent to 6 percent). This approach has many potential benefits, including the opportunity to improve our tax code by cutting back on loopholes and shifting toward a consumption-based tax system. It is also politically impossible, at least in the era of the 60-vote Senate. Those who fear a V.A.T. have little reason to worry — the votes aren’t there.

But the desire sure is.  And, like health care, this is going to be on the left’s agenda from now on.  Orszag just throws it out there as the panacea for capturing the revenue necessary to help “pay down” the deficit.  They may have spent all the money, but it is up to you to pay it back. 

Orszag finishes it up with this:

Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. It’s hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists — including Alan Greenspan and Martin Feldstein — agree that we can’t afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. That’s a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.

In fact, if I’m not mistaken, what Greenspan and Feldstein have said is the tax cuts can’t continue forever without commensurate spending cuts.  That’s a much different point than the one Orszag is making.  Frankly, most Americans, at least right now, want to see those spending cuts before they see any additional taxes.  And they’re going to remain angry and uncooperative (or as the Dems like to say, ‘ungovernable’) until they actually see government serious about addressing the deficit with spending cuts.

Got that, Mr. Orszag – spending cuts are the key to deficit reduction, not new taxes.  Put that in your economic model and crank out a new plan, will ya?

~McQ

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“We are altering the deal. Pray we do not alter it further.”

Over at Instapundit, I see a hard line from a government worker threatened by all this talk of cuts that might be necessary for underfunded pensions:

I’ve been reading your blog for years and I appreciate your nuanced brand of conservatism. But lately, your attack on public pensions has me concerned. Look at it from my perspective:

When I graduated from law school and applied for a job at a Federal agency almost 30 years ago, the deal was simple: “We won’t pay you as much as you might make in the private sector, but you’ll get reasonable pay, great benefits including a generous retirement system, and a reasonable work life.” I took the deal.

{insert various moaning about the sacrifices he has supposedly made here, including such onerous burdens as working at metal desks…}

Apparently though, some people, in and out of government, are no longer happy with the deal. Complaints and warnings about government pensions and pensioners abound. Typically, the narrative is something along the lines of: “Greedy Retired Bureaucrats Still Feeding at the Public Trough as Taxpayers Suffer!”

Well, if you’re concerned about unfunded government liabilities, I agree with you. If you think that government employee pensions are too generous, I’ll listen to what you have to say. But if you just don’t like the deal the government made 30 years ago and want out, I’ll see you in court.

Legally speaking, this guy probably has a point. However, he appears to be missing a much bigger point. The legal right to collect money from a party means nothing if the party simply cannot pay. Both states and the federal government have made promises that they almost certainly can’t pay.

It sounds as though this guy, like many who haven’t thought very deeply about the matter, just assumed that he could find a way to banish such risks from his career. He bought into the fantasy that somehow, some way, government is different.

In the long run, it’s not. Every organization has limits on how it can spend money and the promises it can keep.

Private companies find out pretty quickly when they have reached those limits. For government entities, their monopoly on force and the resultant range of options to collect more money lengthens the feedback cycle, so it takes them longer to realize their mistakes. That just means they get in bigger trouble before the crisis comes.

Employees have been getting shafted by organizations that lost the ability to keep their promises for hundreds of years. I’d like to see this guy tell some Enron folks about his troubles. I don’t think he would get a lot of sympathy.

Yes, legislators have made stupid, stupid promises. In theory, that’s the citizens’ fault because they elected the stupid, short-sighted legislators. However, the citizens are not likely to accept that abstract responsibility. They are going to look at the high tax rates and poor government services in bankrupt states and decide to go elsewhere, as many in California and Michigan have done in recent years.

Almost everybody is going to lose in the debt crisis to come. I’m sorry that someone like Insty’s correspondent, who chose job security over adding value in the more risky free market, now finds out that the security is illusory. That’s life. Those of us in the private sector have always known it. It’s about time government workers understood that you can’t take risk out of life, and that sometimes life isn’t fair.

They also need to prepare themselves for a backlash that’s been building for decades. Government workers, in my experience, work hard and perceive what they do as valuable. This guy seems to be clearly in that camp. However, private citizens have a completely different perception. There’s a reason we have the cliche “good enough for government work”.

When you’ve had a cushy thirty year career with no worries about losing your job, don’t expect a lot of sympathy about your woes from people beset with job insecurity and burdened by high taxes and meddling bureaucrats. Especially when they don’t see what you do as particularly valuable. Drafting and defending new regulations may be hard work, but it doesn’t necessarily add value to society.

This divide in viewpoints is going to come to a head in many places and many ways in the next couple of decades. I know many government workers feel entitled; heck, that kind of entitlement psychology is what leads a lot of them to government work in the first place. However, believing in that entitlement so strongly that you are prepared to thrown your fellow citizens under the bus isn’t going to make the coming conflicts easier.

Recession cafe: today serving Obama economic hash

CNN has a story about a bike store owner who has retrenched and is weathering the recession. Contained in the story is the kernel of the economics of the problem we face and how the administration still doesn’t get it.

Here’s the quote:

Both then and now, D’Amour said the chief problem for small business owners is access to financing. And lawmakers want small businesses to know this complaint is reaching Washington.

President Obama urged Congress last week to move forward on a bill designed to help small businesses, including a $30 billion lending fund to loosen credit lines and $12 billion in tax breaks.

That will help but it won’t solve the problem, said Anne Mathias, director of policy research at Concept Captial.

"It’s not going to bring a rush of people into stores to buy whatever it is these different small businesses have to offer, but it will help," she said. "It’ll help kind of at the back end."

Republicans say the bill won’t have much effect and are urging the president to extend the Bush administration’s tax cuts.

Todd McCracken, the president of the National Small Business Association disagrees.

"Putting money in the pockets of both consumers and small business people so they can take advantage of the opportunities when they come along is crucial," McCracken said Sunday morning on State of the Union with Candy Crowley.

Access to financing, although important, isn’t the base problem. Consumption is – or the lack thereof. Additionally, payroll taxes will be going up for everyone in January (a little known part of allowing the Bush tax cuts to expire).

Question: if you are charged – both short term and long term – with getting the economy moving by implementing policies/laws at a national level, how would you go about it?

Well, in the short term you can provide businesses with all the financing in the world, but unless consumption steps up, it doesn’t do anything useful.  Until buyers are buying, businesses won’t be hiring.

So what’s the best way to quickly boost consumption?  Obviously it is to put more money in the hands of consumers.  And one such way to do that is to cut payroll taxes, or, as has been suggested, have a payroll tax holiday.

That, of course, has been rejected by the Obama administration which feels it would “cost” the government to much money.  They’d rather government “cost” the consumer too much money and the consumer stay home as a result one supposes. 

Instead, the administration is proposing a $100 billion “research and development” credit for businesses.  A couple of observations – that’s not a short term fix and not all businesses engage in R&D. 

The point, of course, is the administration is more concerned about the government revenue stream than the economy and it is, as John McCain has said, just “flailing around”.  It is much more concerned with the “cost” incurred by government necessary to actually have some impact on the economy than it is the “cost” it will impose on the tax payer for it’s future multi-year deficit fueled budgets. 

It refuses the other side of tax cuts – spending cuts.  Instead, it simply intends to shift the burden of its profligacy to you.  And these tax cuts are for show only – a way of claiming to do what the GOP wants without really doing much of anything.  When this tiny and piece meal approach fails to get the dead weight of the economy moving, the left will claim to have tried the right’s prescription and that tax cuts didn’t work.

Anyway, the administration plans to “pay” for this tax credit (oh, so now PAYGO is important) by increasing taxes through closing “tax loopholes” for multinational corporations and some energy companies. This, dear friends, is simply another much desired wolf from the liberal agenda in sheep’s clothing.

The National Tax Payer Union points out that those taxes being proposed as “closing loopholes” will actually make our domestic oil and gas business uncompetitive.   It will, for instance, tax all the revenue Chevron earns (both here and overseas) because Chevron is an American based company but won’t do the same to BP (or Venezuela or China) because BP isn’t an American based company.  Unilateral nonsense like that will put Chevron in an unenviable competitive situation.

Make sense?  Especially in times of recession? Can anyone guess what a Chevron may decide to do (hello Toronto, any office space to lease up there?).  And, of course, the taxes in question will be passed along to the hard pressed consumer with increased prices.  That’ll spur increased consumption, won’t it?

The rest of the proposed economic package is the usual failed stuff – increased infrastructure spending.  The only laudable portion of the package is the proposed extension of the middle class portion of the Bush tax cuts.  But again – that doesn’t put more cash in the pockets of consumers, it simply maintains the status quo.

But the “rich” – tough noogies.  You may have seen administration flunkies out pushing the canard that the tax will only effect 3% of the small businesses out there.   The Wall Street Journal blows that bit of spin out of the water – first by explaining the smoke and mirrors the administration used to produce that number and then pointing out what the number really is:

According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007.

So, the proposal by the administration to get the economy moving is maintain the status quo taxes on the middle class (no immediate impact), provide a limited benefit (at best a long term impact) cut to some business in the area of research and development, more infrastructure spending (long term because of the government project process), an increase in taxes on American oil and gas companies (immediate negative impact) and an increase in taxes for 48% of the small businesses in America (immediate negative impact).

If that’s not a bad tasting hash of ideas, I’m not sure what to call it.  And yeah, you can bet your bottom dollar it will get the economy moving.

Excuse my sarcasm, but obviously this is “rocket science” to the administration, and they’re totally baffled by it.  Someone, anyone, tell me why the GOP should support this?

~McQ

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20 months after taking office, Obama considers tax breaks to stimulate economic growth

All sorts of things to talk about under that title.  So that calls for a bit of a ramble.

First and foremost, the title tells the story.  Why is it we’re 20 months into this administration and we’re just now considering tax breaks to stimulate the economy?  Note the word – considering.  According to POLITICO, there’s been no decision at all made on doing such a thing – if you thought the administration dithered about its strategy change in Afghanistan, this makes that look like a snap decision.

Let’s review:

Last November, Obama announced that he would turn his attention to unemployment, calling it "one of the great challenges that remains in our economy." He declared the same intent two months later, telling House Democrats he would focus relentlessly on job creation "over the next several months." Senior aides went on television pledging that the mantra would become "jobs, jobs, jobs."

But other matters – health care, the BP oil spill – continually stole the limelight, creating the impression, some Democrats complain, that the president was barely focused on the economy at all.

And now, “suddenly”, two months before an election, he’s “focused like a laser beam”.  A soft weak lit laser that sort of doesn’t do much but emit, well, words a bit of light.

I mean, read this explanation and tell me those who offered this as proof of his attention to the economy aren’t both tone deaf and just plain politically stupid:

His advisers described his attentiveness – noting, for example, that he discussed the economy with New York Mayor Michael R. Bloomberg (I) for 15 minutes before golfing – but got little traction.

Really? What in the freaking world has NY Mayor Michael Bloomberg got to do with anything to do with the economy. I mean, oh, goodie, he spent 15 minutes being "attentive" before they hit the links. That’ll fix everything. Oh, and what “traction” was he seeking?

In reality what happened was Obama was sold a bill of goods by his economic advisors about the effect of government stimulus.  Congress got a hold of the idea and larded it up with pork.  Result: spectacular FAIL.

They’re reduced to justifying the stimulus like this:

Many economists say Obama’s policies have been reasonably effective at pulling the nation back from recession. Last year’s stimulus package – now estimated to cost $814 billion – protected as many as 3.3 million jobs, according the independent Congressional Budget Office.

“Many” economists say his policies have been “reasonably effective” because some computer model says it may have “protected” – note the new word – “3.3 million jobs”?  Really?

Back to the “this ain’t rocket science” theme, but even if that’s true (and it’s very suspect) that’s about $250,000 deficit funded dollars per job.  And most of those, if I were to guess (oh, wait – “according to my model”) would be found in the non-productive government sector.  Result?  9.6% unemployment, no growth and no jobs.

So why, you ask at this late juncture, is he and his economic staff finally considering tax cuts?

Well, common sense says that the way to immediately impact spending and consumption is to give consumers more money with which to consume.  Make sense?  Yeah, it made sense 20 months ago too.  And there’s another reason that finally has seemed to penetrate their thinking:

All the talk about taxes—whether to raise them to address the deficit or cut them to stimulate the economy—may be having its own effect on growth. Allan Meltzer, an economics professor at Carnegie Mellon University, said the economy wouldn’t fully revive until Washington resolved uncertainty surrounding business costs, including taxes.

"Companies are cutting their expenditures and not hiring because they’re very uncertain" about these costs, he said.

Precisely.  Why in the world – as we’ve been saying for months here – would any business hire and expand in the face of this government made market uncertainty?

Meanwhile the political battle rages with the expected blame-game in full swing:

"Obviously it’s going to be hard to get anything done before the election, but it’s really important for him to try, and to make the case to the American people that he’s trying to do something and the Republicans aren’t letting him," said Steve Elmendorf, a Democratic strategist. "We are at the final moments here."

What the GOP isn’t “letting” them do is wildly throw another huge amount of money we don’t have at the problem.

David Axelrod piles on:

"We’ll continue to do everything we can, understanding that recovery will require persistent effort. There are no silver bullets," senior Obama adviser David Axelrod said in an interview Thursday. "At the same time, we have to make clear our ideas and theirs, and the fact that the Washington Republicans, having helped create this recession, have attempted to block our every effort to deal with it."

Yet the bar to passing any of this may not be “Washington Republicans”.  POLITICO reports:

But the administration will have a tough time selling nearly any package to some Democrats who increasingly blame the president and his ambitious legislative agenda for their own dismal prospects this November. And further states:

White House press secretary Robert Gibbs has repeatedly said the administration would go small-ball with any plans to boost the economy — and that the Democrat-controlled Congress had no appetite for costly, sweeping measures two months before what promises to be a difficult election cycle for the party. >

Emphasis mine, but you get the picture.  Democrats aren’t sure they want anything but if they do, whatever it is it has to work and work quickly.  Reality, however, is much more stark for the Democrats:

"Substantively, there is nothing they could do between now and Election Day that would have any measurable effect on the economy. Nothing," said the Brookings Institution’s William Galston, who was a domestic-policy adviser to President Bill Clinton.

Indeed.  As I continue to watch the economic three-ring circus this administration has created, I’m reminded of the words of one of my favorite funny men, Oliver Hardy: “Well, here’s another nice mess you’ve gotten [us] into."

Next up, the Three Stooges do ObamaCare.

~McQ

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German recovery, part II

I discussed this earlier with a post about Paul Krugman and Gary Becker, explaining why the German approach – essentially getting government out of the way while providing incentives to businesses for expansion and hiring – was superior to the tried and consistently failed tactic of huge amounts of government deficit spending as a "stimulus". Krugman and others waved away the German recovery as simply an upsurge in exports, nothing more.

E21 has an excellent article out today in which it takes exception to the Krugman claims (note too that E21 refuses to call Krugman and economist but instead refers to him as a “commentator”):

U.S. commentators, like Jonathan Chait and Paul Krugman, have taken issue with holding out Germany’s economic recovery as a success story – one that contains lessons for U.S. policymakers. Contrary to their claims, Germany’s recovery does not appear to just be about trade flows and global demand for their manufactured goods. 50% of their second quarter GDP came from private sector consumption and investment growth.

Private sector growth – what a concept, no?

Here is an extended excerpt which is probably one of the best explanations I’ve seen. The last line is so irony laden that it almost makes you wince.  Also, as you read this carefully you will again note the obvious – “this ain’t rocket science”:

The contractionary effects of deficit-financed stimulus were highlighted by European Central Bank (ECB) President Jean-Claude Trichet at the Jackson Hole conclave. While many commentators in the U.S. still depict the debate over stimulus as pitting sagacious “pure” economists that favor more deficit spending against the politically astute economic illiterates, Mr. Trichet explains that the Franco-German technocrats in Frankfurt view the economic literature as counseling steep budget cuts in the current environment. Many U.S. economists speak of the need to increase deficit-financed public expenditure to avoid a Japanese-style “lost decade”, yet it is precisely the exploding public debt ratios that Mr. Trichet identifies as the real cause of Japan’s malaise and the greatest risk to Western economies today. To those who believe sharp reductions in public expenditure are too risky, given overall economic weakness, Mr. Trichet responds that deficit-financed stimulus is unlikely to provide any measureable boost to demand in the current environment because the government purchases are offset by reduced private expenditure. And on this point, Mr. Trichet even goes even further:

“There is the additional argument positing that credible fiscal deficit reductions through expenditure cuts lead the private sector to expect a lower future tax burden, especially when the nature of the cuts make future tax reductions more likely. This can generate higher consumption expenditures and more investment.”

Lest anyone believe Mr. Trichet was talking about modest cuts to public expenditure to assuage irrational markets, he went on to suggest that cuts to government spending should be sufficient to reduce debt-to-GDP ratios by 30 percentage points over the medium term. Mr. Trichet cites numerous examples where cuts of this magnitude have resulted in improved short-run economic performance. That it takes a French lifetime bureaucrat to travel to the American West for these words to be spoken at a U.S. policy symposium says something fairly profound about the current state of policymaking in the U.S.

Again, as I mentioned in the first post I’ve cited, the proof is in the pudding.  Germany is back to pre-recession unemployment rates and excellent GDP growth.   And where, again, is the US during “recovery summer”?

Perhaps now you can understand the reason Mort Zuckerman has referred to the economic policies of this administration as our “economic Katrina”.  At this point we’d better hope the worst we suffer is a lost decade like Japan’s.

~McQ

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Per the NYT – How Obama could save Obama (and the Democrats)

This magic formula for doing what the title suggests is courtesy of a New York Times editorial. After the appropriate amount of "the obstructionist GOP", and "poor Obama inherited this mess" whining, the NYT gets down to what it considers to be the brass tacks of the situation:

The question then is whether Mr. Obama will lead. He cannot force Congress to act, but he could pre-empt Republicans’ diatribes — on the deficit, on small business, on taxes — with tough truths and a big mission that would tie together the strategies and the sacrifices that will be needed to put the economy right.

The first sentence pretty much shoots the whole thing in the foot, doesn’t it?  Even if you agree 100% with the NYT formula for political success, getting Obama to lead on anything is simply not very likely.  He’s not a leader in a job that demands such a type.  He’s, at best, a policy wonk.  And judging by his economic policies not a very good one.

But back to the magic show that the NYT claims could save the left.  Per the editorial, the country needs “tough truths” and a “big mission” with which to motivate the people enough to “put the economy right”.

Here’s an idea – how about policies which enable businesses by providing incentives to get off the cash they’re piling up, expand and hire?  Settle the markets down by backing off government regulation, and intrusiveness.  Back off new taxes and roll back some old ones.  Stop spending money we don’t have.  Make a real attempt to address the deficit.

Or:

Mr. Obama also needs to inspire Americans who have been ground down by the economic crisis and Washington’s small-bore sniping. He needs to rally the nation around a big idea — a project that is worth sacrificing for, worth paying for, worth working for. One that lets them know that there is more ahead than just a return to a status quo of lopsided growth in which corporate profits surge while jobs and incomes lag.

That mission could be the “21st century infrastructure,” that Mr. Obama mentioned on a multi-city trip this month, “not just roads and bridges, but faster Internet access and high-speed rail.” It could be energy independence, with high-tech green jobs and a real chance for addressing global warming. Either of the above would make sense, economically and politically.

Mr. Obama and his economic team had clearly hoped for an economic rebound in time for the midterm elections. They are not going to get it. The economic damage they inherited was too deep, and the economic stimulus they pushed through Congress, for all of the fight, was too small. Standing back is not doing the country or his party any good. We believe Americans are ready for hard truths and big ideas.

Wait – didn’t we just pour almost a trillion borrowed dollars into that “big mission”?  Wasn’t it all about shovel ready infrastructure projects?  And hasn’t it been a spectacular failure.

Certainly there are “infrastructure” needs that require addressing.  But when you have an official unemployment rate of 9.5% (and an unofficial and much more accurate one well into double digits), people aren’t going to be impressed by “faster internet” and “green projects” that never seem to get anywhere and cost and arm and a leg.  And high-speed rail?  Really?

Oh, and the “chance to address global warming” is what – a chance to increase taxes, cripple businesses and make it even less likely that unemployment will improve.  Yeah, that’s the ticket.

Anyone who thinks people hurting economically would be impressed with this nonsense, even if Obama could and would lead, have to be living in an ivory tower somewhere.   People want jobs, not high speed rail or faster internet.  They don’t care if their job is a ‘green job’, they just want a freakin’ job.   And global warming – the majority of the population doesn’t even agree it’s happening much less wanting costly government programs that address it by taking money from them.

Why is it the left doesn’t seem to understand that it is time to put the agenda aside and focus on the nuts and bolts of creating jobs? The need is immediate – not some 5 to 10 years away.

The reason is because such a focus would mean actually admitting that their present agenda is hurting such an effort as well as acknowledging that government may not be the answer (instead, getting government out of the way actually is the answer).

So we get these sorts of pathetic pleas to a man who couldn’t lead a group of 5 year olds to an ice cream truck to essentially keep the agenda alive by disguising it as something it is not – a way to fix our economic problems.

Clue to the NYT.  Yes, the people are open for tough talk about shared sacrifice.  The rally in DC this weekend underlines that.  Here’s the problem for the left – the sacrifice they first want and expect to see is at the expense of this bloated, wasteful and ineffective national government that has its fingers in way to many pies.  Until they see real spending cuts, real downsizing and real governmental reform that benefits them and the engine of the economy – businesses – they’re uninterested in any nonsense about more government or more government spending or 21st century agendas.

To continue a theme, this ain’t rocket science, but it certainly is something that seems to be beyond the capacity of the left to grasp.  As it turns out, November will most likely reward them properly for their consistent inability to do so.

~McQ

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Austrian economics – "It ain’t rocket science"

I‘ll never forget Dale telling me during a phone conversation, "the more I look at the economy and what the Austrians have been saying about it, the more I find their arguments compelling".

He’s not the only one.

"The Austrians", of course, are those economists from the "Austrian school", which is a true free market school. Probably the most famous of the Austrians is Frederic Hayek. Hayek wrote "The Road to Serfdom" and the "Constitution of Liberty". If you don’t mind my saying so, they’re "must have books".

Another "must have" is "Human Action" by Luwig von Mises.

The point, however, is their writings seem more and more valid each day as we watch the policies that are driving this economic debacle play out.

Anyway, the article tells about Prof. Pete Boettke at George Mason University who is leading the charge for the Austrian brand of economics. And, as you might imagine, there’s a increasingly bigger demand for information pertaining to it.

From the article about the concerns of the Austrians:

Economics, they [the Austrians -ed.] feared, was increasingly narrow and technical but not necessarily wise. They also remained skeptical of the Fed’s approach to targeting stability in consumer prices.

That shouldn’t be the Fed’s goal, says Mr. Boettke, who a friend lured back to George Mason a year after he was denied tenure. The Fed, he says, should be to make money "as neutral as possible, like the rule of law, which never favors one party over the other."

That sometimes means letting prices fall. There’s little to fear in deflation, he adds, when it accompanies periods of strong productivity growth. However, "anytime you saw the price level starting to fall, the Fed flooded the economy with cash," he says. "And that resulted in asset-price inflation, which set us up for these crises."

It wasn’t a lack of government oversight that led to the crisis, as some economists argue, but too much of it, Mr. Boettke says. Specifically, low interest rates and policies that subsidized homeownership "gave people the crazy juice," he says.

Boettke also participates in a group blog about Austrian economics if you’re interested.  One of the posts is about the fact that in most cases, economics isn’t “rocket science”. That’s something I’ve been saying for years in various ways – human nature 101, common sense 101, economics 101.

All economics action is based deeply in individual actions of human beings driven by  human nature.  One of the reasons that von Mises named his book “Human Action” is he and the other Austrians recognize that fundamentally all economics is based in just that – human action.  In other words, grassroots up.  Not the other way – top down. 

That’s precisely why you’ll constantly see Austrians claim “it ain’t rocket science” when they explain why central planning never works.  And what we’re going through now is no exception.  Boettke:

I don’t possess a crystal ball, so I cannot forecast the economic future. But I do know that it is not good to expand the monetary base 140% or to run deficits the size we have, or accumulate public debt as we have. See Laurence Kotlikoff in The Economist.  This "ain’t rocket science"!  There will be a day of reckoning due to the monetary mischief and fiscal irresponsibility.

I also know that the problems we are facing are not "market problems" — it is not that actors are all of a sudden ‘irrational’, and it is not that markets are inherently ‘unstable’.  Everything we are seeing in market behavior is a rational response to the environment created by public policy.  This is not a psychological problem we are dealing with, it is a public policy problem.  Bad public policy produce bad incentives which in turn produce bad results.  Ultimately, this is a problem of bad ideas which result in bad public policies.  Again, this ain’t rocket science.  The role of the economists in all of this should be like my Dad when I was a teenager (and truth be told an adult), and grab policy makers by the shoulders star them squarely in the face and state clearly "this isn’t rocket science" and explain clearly the Econ 101 basics of why the decisions we have made so far have not been correct.

Gerald O’Driscoll over at ThinkMarkets does precisely this today.  Nothing that has gone on so far with the housing market would be unpredictable with a little return to the lessons of Econ 101 about incentives and information, and how markets work to coordinate plans through time via relative price adjustments and profit and loss accounting.  Policies produce incentives, when individuals in the system follow the path those incentives lead them to pursue, we should not be surprised (and certainly not disappointed). The policies adopted produced the results we see, not individuals behaving badly or behaving ‘irrationally’.  Unfortunately, in our efforts to be ‘sophisticated’ we often confuse simple economics with simple-minded economics.  But there is nothing simple-minded about returning to simple basics of economic science.  This ain’t rocket science, but individuals respond rationally to incentives and demand curves slope downward and supply curves slope upward.

Read through that carefully and recall how many times here we’ve discussed how humans respond to incentives and why a certain policy seems to ignore that and the "experts" seem "surprised" by the "unexpected" outcome.

It ain’t rocket science, for heaven sake, but like Boettke and the Austrians claim, we’ve decided mathematical models and technical arguments are more persuasive – in the policy making arena – than are human nature and common sense.

I mean, look around you at the shambles the other schools of economics have made this place.

If I had to give the Austrian school of economics another name it would be the common sense school. It is based exactly at the level it should be based, recognizes the fundamental role that individuals play in economics and economies, and the realize, from that fundamental truth – common sense – that top down, central planning is the wrong place to start when devising economic policy.

Unfortunately that’s precisely where our present economic policy is formulated and the result is fairly easy to predict.

The article ends with:

But as much as the Austrian diagnosis may resonate now, it doesn’t provide a playbook for what to do next, which could limit its current resurgence.

Mr. Hayek rightly warned of the dangers of central planning, Mr. Boettke says, but "he didn’t give a prescription for how to move from ‘serfdom’ back."

I disagree.  If “serfdom” is found at the end of the policy road we’re traveling right now, then the prescription for how to move from “serfdom’ back is to reverse the route we’ve traveled.

It ain’t rocket science folks.  We may not like the prescription, and it may include quite a bit of hardship, but there is a road back from the economic serfdom we’re destined for if we don’t do something and do it fairly quickly.

~McQ

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